WSJ: Offshoring Losing Its Luster

By Deb Perelman |
Posted 2007-07-03

India's outsourcing boom has largely been powered by Silicon Valley, which has shifted great sums of IT and engineering jobs in Bangalore's direction for the last several years. When the outsourcing boom took off in 2004, the salaries of software engineers were but one quarter of what San Francisco-area computer engineers made, evidencing the clear cost-savings of the business arrangement.

"Taking into account the time difference with India, we weren't saving any money by being there anymore," Mujal Shah, CEO & co-founder of Riya, a San Mateo-based visual search engine, told the Journal.

Shah is among those who have shut down their Bangalore offices and offered half of the workers opportunities to join the San Mateo office with work visas, but it has had little overall effect on India's booming tech and outsourced services industries.

Pundits had long argued that not only would subcontinent outsourcing rob the United States of high-end white-collar jobs, but that, eventually, salaries would even out between the United States and India. Due to increased competition, wage inflation is rife (10 to 15 percent per year, by some estimates, 50 percent by others, while in the United States it is 3 percent), turnover rates are staggeringly high and concerns have increasingly been voiced over the language proficiency, cultural fit and practical skills of India's computer engineers.

In addition, Silicon Valley companies discovered hidden outsourcing costs rooted in geographic and time gaps and the need to hire more U.S. managers to manage the outsourced relationships. Companies that pull out of India face huge losses as well, in one case $2 million.

The answer for the Indian economy, argues the Journal, is for its tech giants to expand into higher-margin businesses to sustain margin growth rates and continue to grow market share. But whether this will happen remains to be seen: The majority of its tech sector's business still derives from software coding, tech maintenance and support work.